Another good post from the Brad Feld college of venture financing - part three in his series.
The protective provisions are often hotly negotiated. Entrepreneurs would like to see few or no protective provisions in their documents. VCs – in contrast – would like to have some veto-level control over a subset of actions the company could take, especially when it impacts the VC’s economic position.
While one could make the argument that protective provisions are at the core of the “trust” between a VC and entrepreneur, we think that’s a hollow and inappropriate statement. When an entrepreneur asks “don’t you trust me - why do we need these things?”, the simple answer is that it is not an issue of trust. Rather, we like to eliminate the discussion about who ultimately gets to make which decisions before we do a deal. Eliminating the ambiguity in roles, control, and rules of engagement is an important part of any financing – the protective provisions cut to the heart of some of this.
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